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Back to the Product Economy?

I was planning to write about something completely different this week, but with the current US financial crisis, it’s hard to focus much on anything else right now.

From the many letters I received, what especially seemed to ring a bell was this statement: “Finally, I will say I think the US economy for awhile has been too driven by the financial industry. Those days are obviously gone for many years to come. Whatever form it takes, the “real product” economy is going to have a bigger impact on our economic growth than it has the past few years – and that’s good for the supply chain.”

We received some two dozen short responses that looked favorably on the potential for that kind of evolution – back to the future, if you will.

Chris Alder of Access Business Group, for example, wrote, “I also hope for the day when we become (again) a product-driven producer-society, and not that of 'financial products'.”

Jerry Saltzman of Wyeth added that “I, too, would like to believe Dan Gilmore's assertion that the influence of "real product" will be stronger for the foreseeable future. The financial industry should serve as the economy's electric grid, providing the power to drive factories. For the last 8-10 years, however, the financial industry has acted more like factories, creating incredible wealth for a few while the "real product" factories are forced to make short term sacrifices to keep up or be bought up. Unfortunately, when the power lines go down, everyone suffers.”

Gilmore Says:

"We’re giving too much intellectual property away to China and others, and often ignoring the “cost innovation” that is increasingly the basis of Chinese competition – not just low wages. Etc."

So, is there a real chance the “product economy” in the US and maybe parts of Europe (see below) will see some re-ascendance?

One huge question out there is whether the misgivings in many quarters about the speed and fallout from globalization will lead to modest or even heavy protectionism of some kind – forcing, if you will, more products to be made domestically.

Pat Buchanan is among the protectionist-leaning commentators (he from the right, many others from the left), and I thought his summary of the situation that tied the current financial crisis to offshoring was interesting:

“This generation decided we must march bravely forward into a Global Economy, where we all depend on one another. American companies morphed into “global companies” and moved plants and factories to Mexico, Asia, China and India, and we began buying more cheaply from abroad what we used to make at home: shoes, clothes, bikes, cars, radios, TVs, planes, computers,” Buchanan wrote a few days ago. “As the trade deficits began inexorably to rise to 6 percent of GDP, we began vast borrowing from abroad to continue buying from abroad.”

I can’t find it now, but I read another column earlier this week that noted that since the early 1990s, too many of the best and brightest of US graduates didn’t move into “product economy” jobs, but rather Wall Street, hedge funds, and other financial industry careers. While there always has, will be, and should be some of that, the point was that it had become far too unbalanced, as huge salaries were being made moving money instead of building and moving goods.

So, will we see the movement of more graduates into fields like engineering, and business majors heading for Midwest manufacturers looking for jobs instead of the financial sector? Probably Yes in the short term, as the opportunities won’t exactly look bright on Wall Street for a few years.

This isn’t just a US issue. Below is a snippet from an article last week in London’s Daily Sun newspaper: “The government is not alone in touting the charms of the factory floor: newspapers are full of articles urging Britain to return to its industrial roots. And small wonder, for the financial-services sector, long the engine of economic growth, is on its uppers.” It added: “Manufacturers, who generally consider themselves officially ill-used, are pleased that the government is recognizing their importance.”

The article notes that in 1978, manufacturing represented 26% of UK’s GDP. Today, it is just 14%. In the US, the number is about 12.5% of GDP, and that is also down sharply from two decades ago. But, the National Association of Manufacturers has data that shows the US share of global manufacturing has actually remained constant for many years, and argues (persuasively) that among the key factors in the decline of manufacturing as a share of GDP is that prices for manufactured goods have not risen nearly as fast as raw production output and, in many cases, even declined. Meanwhile service prices (such as, hmmm, financial services) have risen during the same time at a much higher rate. Let’s face it, the services sector is not nearly as price competitive in a global sense as is manufacturing, and simply doesn’t have much, if any, productivity growth. So, its share of total GDP rises as a result.

Of course, the issue is complex. Apple and Nike are certainly “product companies;” they just don’t make any of it here, as with a growing array of others. Even the US automotive companies are increasingly talking about outsourcing production to low-cost countries.

Again, contrary to what many believe, US manufacturing has actually continued to enjoy overall solid growth over the past decade. It just can do it now with a lot less workers to achieve the output (productivity increases and automation). At the same time, supply chain developments (i.e., The World is Flat) have certainly been the key enablers in making offshoring work in terms of costs and time.

We can’t and shouldn’t try to put globalization back in the bottle. I am largely a free trader, and will let the politicians and the elections hash out whether we should make some checks on the current situation. But I don’t think we should just stand still.

We can’t rely on the financial sector any more to be the world economic leader. The US still has by far the largest GDP, but I believe we will need to rethink where attention, resources and investment goes. Our manufacturers have among the highest tax and health care costs in the world. We are the about the only country that adds duties on offshore components coming into Free Trade Zones for final assembly. Most of the HarvardBusinessSchool graduates have been looking at Wall Street or consultancies instead of companies that actually make things. We’re giving too much intellectual property away to China and others, and often ignoring the “cost innovation” that is increasingly the basis of Chinese competition – not just low wages. Etc.

We just need to re-assess and act based on what adds real value to the economy. It isn’t an endless series of derivatives and other new financial instruments. The design, innovation, and (where it makes sense) actual production of real products needs to move up the priority list - in a hurry.

Do you think we can – or should – focus more on the “real product” economy? What can the US and European countries do to put more vigor back in the manufacturing sector? Do you think this financial crisis will lead to real action? Let us know your thoughts at the Feedback button below.

Rollercoaster activity doesn’t quite describe the movement of stocks on Wall Street last week – and neither does spring-loaded, but it’s the best we can do. Our Supply Chain and Logistics stock index results look as if they were shot from a cannon, with some soaring and others diving. In the software group, Ariba and SAP rocketed (up 10.7% and 9.3%, respectively), while Logility and JDA plummeted (down 8.2% and 5.7%, respectively). In the hardware group, Intermec soared 14.6%, while Zebra also realized respectable growth (up 6%). In the transportation and logistics group, Expeditors’ International climbed 8.4%, and Yellow Roadway recovered a bit of last week’s slide (up 7.3%) following the naming of Timothy Wicks as their new executive vice president and chief financial officer. However, J.B. Hunt, CSX, and Prologis all ended the week down.

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Feedback continues to pour in each week – but we want more and, with this in mind, are pleased to announce our new
“Fuel for Thought” program. If your response is selected as our Feedback of the Week, we’ll send you a $20 gas card. Must have complete name and company, and you can only win once every three months. Send in your Feedback regularly! Make it thoughtful if you would like to win.

We received a number of letters on our First Thoughts piece on “How Real is the Green Supply Chain?” That includes our Feedback of the Week from Tom Dadmun of Adtran, who says we have lots of win-win opportunities now before we have to worry about hard decisions. Cate Field of Super Cheap Auto says she expects manufacturers to offer green-friendly products that don’t require consumer compromise, while Timo Vierikko of TRAVIA says the key is to Lean out the supply chain. T.A. Krishan of Larsen & Toubro Limited says consumers will not generally pay more for green, so governments will have to do it by regulation.

Good responses all – have a look.

Feedback of the Week – On the Green Supply Chain:

Greening of the world is happening whether from a social consciousness or forced upon you. Right now, the force is more from the customer requiring additional cost savings while "Greening." There is a lot of money - cost savings - in Greening, now that we are forced to look for it, by gosh, there it is! Yes, we should have been doing the analysis before, but other pressures were forcing us to look at other avenues such as lean, or 6 sigma, or process improvement. The so called crusaders are marketing green results such as power consumption reduction on products as a green thing, but it is also the right thing to do. Thus, the line blurs as to what is socially conscious greening, and what is the logical thing that we should be doing but calling it green, AKA "greenwashing".

I think we are a long way from whether or not we will pay more for a green product in some consumer markets. We are just scratching the surface in plain, logical, efficient process improvements that can be called green. In some industries, we have a long way to go before we hit the line where greening will be an additional cost. In the mean time, our greening improvements can and should make the cost saving cup runneth over!

Tom Dadmun
VP Supply Chain/Program Management
Adtran

More on Green Supply Chain:

What I find frustrating about society today is that everyone thinks there has to be a “trade-off” if we are going to be ‘green!'

I don’t want any trade-offs and I want to become green and I am going to keep putting pressure on my supply chain and world around me to get it. Technology is the answer and we might not have it yet, but that's called an ‘investment,’ NOT a trade-off. I am not going to stop driving my car and I am not going to stop buying products in the supermarket that I need for everyday life – BUT, I will change my purchasing habits the second the technology is available that offers the same level of service, but is ‘green.'

For example, I am waiting until the hydrogen-powered car hits the sales floor and I will be one of the first to drive it in my state. I have already, and will continue to do so, swap any product I buy in the supermarket for an equal alternative that is green! Shampoo, conditioner, dishwashing liquid, washing powder, soap, toilet paper, etc. – BUT, I will not settle for any less performance! We shouldn’t have to! We put a man on the moon for heaven’s sake – I think we can invent products that fit the life-cycle of being green! Plus, in my experience, there are a lot of financial benefits to being green – as you mentioned, reducing packaging, reduces freighting costs, reduces storage costs, reduces space allocated on shelf… the list goes on. When I changed all the light bulbs in my house to the “more expensive” ones, I feel satisfied that I will actually get more value for money with them lasting up to 8 times longer than the orginals. I don’t see how I am ‘trading-off’ anything there. I could go on about this forever, but I think you get my point.

People need to start ‘investing’ in our future and designing products & services that are equal or better in performance which are ‘green.'

Cate Field
Logistics Packaging Manager
Group Logistics

Lean logistics, avoiding all waste is green! Let’s keep working on it – biz as usual! Use green arguments to wake up companies to work on lean – not only inside production, but thru the rest of the supply chain as well!

Timo Vierikko
TRAVIA

Left to private sector initiatives, the adoption of the measures will be slow or limited as ultimately companies have to make profits to survive. At best, companies earmark certain funds that they can afford to. There are few, if any, Green Products that will cost less than the comparative "non-green" ones.

If the Green Supply Chain is to get a head start, it has to come from Policy measures of local Governments whether in the form of plastic ban, energy-efficient lighting, efficient fuels, or bio-fuels that does not harm the cause of food and the like.

For example, in plastics, it is a sheer agony to find heaps of waste generated from the retail revolution. To compound the wastage of primary and secondary packaging, from vegetables to consumer durables, they are served in carry bags that become useless the moment you open the product.

If malls were to price carry bags at a premium, there would be lot of reduction in plastic waste, but due to a competitive environment, they will not do it as the business will flow to those who do not implement such a measure. Hence, the need for intervention by the local Government.

T. A. KRISHNAN
Larsen & Toubro Limited
Mumbai-India

SUPPLY CHAIN TRIVIA

Q.
What year was the first "pick to light" paperless picking system (using operator displays) implemented in distribution.